By Paul Thomas is Managing Director of risk analytics and decisioning solutions provider Provenir
Small businesses can find it difficult to secure funding. They often lack a credit history, making it hard for finance providers to assess the level of risk they carry. They also tend to be a less attractive proposition for traditional finance providers, as they apply to borrow smaller amounts.
Yet the importance of SMEs to the UK, and global economy cannot be over-stated. They have a significant combined turnover and provide employment for people working in the private sector.
A new breed of funding providers entered the market to provide alternative access to funding for SMEs. These offerings, including peer-to-peer lending and e-commerce finance platforms, are supported by financial technology (fintech). The opportunity fintech provides in helping to meet the financing needs of SMEs is acknowledged in a recent white paper by the World Economic Forum’s Global Agenda Council.
With the rise of fintech, we see that cloud technology can provide compelling benefits to finance providers as they strive to meet customer needs and their own business objectives. These include reduced capital investment, more time for staff to focus on customers rather than IT, scalability and data for advanced analytics.
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Small businesses are the lynchpin of the UK economy. Government statistics show that SMEs account for 99.9 per cent of UK private sector companies, have a combined annual turnover of £1.8 trillion – nearly half (47 per cent) of all private sector turnover in the UK – and provide 60 per cent of private sector employment. Economic growth is assisted by the growth of small businesses.
To grow their businesses, SMEs look to acquire funding. However, last year, the Department for Business Innovation & Skills put the rejection rate for first time SME borrowers at around 50 per cent. The requirement on lenders to meet strict internal safeguards and external regulatory mandates, and the sometimes slow, often manual risk analytics and decisioning processes in use, can make the going tough for lender and borrower alike.
For small businesses, the time and effort required to pull together a credit or loan application can be daunting, especially when faced with the prospect of failure. Generally operating with a small number of staff, the small business owner is often managing all financial aspects of the business themselves; for them, investing time in funding matters can be an unwelcome distraction from their core business.
Although in the short-term the effort finance providers must put into risk-assessing a prospective SME customer may outweigh the reward, in the long-term SMEs can grow into significant clients and provide ongoing profitable relationships. They may, after all become big businesses in their own right and could well be developing the next big business success.
Cloud-based solutions can free up financial institutions from having to build and maintain everything themselves. Sourced from specialised solutions providers, they can support not only the processes that underpin credit and lending, but also the entire credit lifecycle.
Through specialised services from niche providers who innovate for the cloud, companies can stay relevant with new, improved services. These can help free up resource within the company by reducing the need for staff to focus on IT; instead putting the focus on customers and core business.
With a reduced need to maintain and support a complex IT infrastructure, scaling up and down as needed also becomes simpler. Finance providers can increase capacity at times of high demand and scale back down at low demand instead of having to maintain hardware that is regularly under-utilised.
A cloud-based risk analytics and decisioning solution can also reduce the need for often significant capital investment in hardware and infrastructure to get up and running with a solution.
It can also open up opportunities to make more effective use of data held on customers, products and repayment models. The processing capability to utilise this big data can reside in the cloud and tapping into it can provide a wealth of information at a granular level of detail previously unattainable.
New market entrants have been able to exploit fintech to the maximum. In contrast to long-standing financial institutions they do not have legacy infrastructure or interconnected, established systems supporting customer products and services that need to be maintained. They are lean, without a wide ranging product set or customer base to support. They offer alternative, viable options for SME financing.
Fintech can provide solutions that help financial institutions compete in established markets and innovate within their own processes, helping to bridge the funding gap for small business.